On June 30, 2016, the Ontario Securities Commission (OSC) published for comment OSC Rule 72-503 - Distributions Outside of Canadaand its related companion policy and form (collectively, the Proposed Rule). The Proposed Rule provides explicit exemptions from the requirement to file a prospectus in connection with a distribution of securities to investors outside of Canadain an effort to provide certainty to participants in cross-border transactions.

If adopted, the Proposed Rule will replace the 1983 OSC Interpretation Note 1 Distributions of Securities Outside Ontario, which provided guidance that, where an issuer and intermediaries take “reasonable precautions” to ensure securities distributed out of Ontario “come to rest” with investors outside of Ontario, and there are no other circumstances that would call into question the integrity of Ontario capital markets, the OSC would take the view that a prospectus was not required under the Securities Act (Ontario), nor was an exemption from the prospectus requirements necessary.

In publishing the Proposed Rule, the OSC has indicated that the Interpretation Note is out of date and no longer accurately represents OSC staff practice.

The Proposed Rule

The Proposed Rule provides four express exemptions from the prospectus requirement for certain types of outbound distributions:

1. Distribution under public offering documents in foreign jurisdictions

The Ontario prospectus requirement does not apply to any distribution of securities from Ontario to a purchaser outside of Canada if:

  1. the issuer has filed a registration statement in accordance with the United States Securities Act of 1933, as amended, registering the securities in connection with the distribution, and that registration statement has become effective, or
  2. the issuer has filed a document similar to a final prospectus for which a receipt or similar acknowledgement of approval has been obtained in accordance with the securities laws of a designated foreign jurisdiction (including, among other jurisdictions, Australia, France, Germany, Hong Kong, Japan, Mexico, New Zealand, Singapore, South Africa, Sweden or the United Kingdom) registering the securities in connection with the distribution or qualifying the securities for distribution.

2. Concurrent distribution under final prospectus in Ontario

The Ontario prospectus requirement does not apply to a distribution of securities to a person or company outside of Canada if:

  1. the issuer of those securities or the selling securityholder has complied with the securities law requirements of the jurisdiction outside of Canada, and
  2. prior to the issuance or resale of the securities, the issuer of those securities has filed with the OSC and a receipt has been issued for a final prospectus qualifying the concurrent distribution of such securities in Ontario in accordance with Ontario securities law.

3. Distributions by reporting issuers

The prospectus requirement does not apply to:

  1. a distribution of securities to a person or company outside of Canada if, in connection with the distribution, the issuer of those securities or the selling securityholder has complied with the securities law requirements of the jurisdiction outside of Canada, and
  2. the issuer of the securities is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding such distribution.

4. Other distributions

The prospectus requirement does not apply to a distribution of securities to a person or company outside of Canada if, in connection with the distribution, the issuer of those securities or the selling securityholder has complied with the securities law requirements of the jurisdiction outside of Canada.

However, the first trade of securities distributed under this exemption will be deemed a distribution subject to the prospectus requirement unless the trade is to a person outside of Canada, or both:

  1. the issuer of the securities is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding the trade, and
  2. at least four months have elapsed from the distribution date.

There are disclosure requirements associated with the exemptions 2, 3, and 4, listed above. Generally, issuers selling securities outside of Ontario in reliance on these exemptions will have to electronically file a short outbound report with respect to the exempt distribution. Note that this streamlined report will not require significant information about outbound purchasers.

Exemptions from the dealer and underwriter registration requirements

The dealer and underwriter registration requirements in the Ontario Securities Act will not apply to a distribution outside of Canada that is qualified by a prospectus filed in Canada or that is exempt under one of the four prospectus exemptions listed above, if the dealer or underwriter satisfies all of the following requirements:

  1. the head office or principal place of business of the person or company is in the United States, a designated foreign jurisdiction or Canada;
  2. in the case of a distribution to a purchaser in the United States, the person or company is registered as a broker-dealer with the United States Securities Exchange Commission, is a member in good standing of Financial Industry Regulatory Authority and complies with all applicable regulatory requirements;
  3. in the case of a distribution to a purchaser located in a designated foreign jurisdiction, the person or company is registered in a category similar to a dealer in that jurisdiction and complies with all applicable regulatory requirements;
  4. the person or company does not carry on business as a dealer or underwriter from an office or place of business in Ontario except in accordance with OSC Rule 32-505 - Conditional Exemption from Registration for United States Broker-Dealers and Advisers Servicing U.S. Clients from Ontario or pursuant to the Proposed Rule;
  5. other than an issuer or selling securityholder involved in a distribution that is exempt from Ontario prospectus requirements under the Proposed Rule, the person or company does not trade securities to, with, or on behalf of, a person or company in Ontario; and
  6. the person or company relying on the exemption is not registered as a dealer in any jurisdiction of Canada.

Request for comment

The Proposed Rule is open for comment until September 28, 2016.